FUNDAMENTAL 
INVESTMENT 
PRINCIPLES 



Fundamental Investment 
Principles 




PUBLISHED BY THE 

INVESTORS PUBLISHING COMPANY 

CHICAGO, ILLINOIS 



<? 



^v 



Copyright, 1915 

by 

Investors Publishing Company 



ffi 



2** 



SEP 22 J9I5 

©CI.A410607 

f s ^ 



CONTENTS 

CHAPTER I.— PRELIMINARY 

Page 
Foreword ---------- 9 

General Remarks on the First Accumulation 

of Funds ---------13 

Test Questions __-___-- 15 
Fundamental Considerations ----- 25 

Banker's Advice --------28 

List of Investments Should be Classified - - 29 
Redeemable Securities -------29 

CHAPTER IL— BONDS 
Text of a Bond -------- 33 

Government, State and Municipal Bonds 34 

Corporation Bonds -------42 

Subdivision of Railroad Bonds 45 

First Mortgage Bonds ------ 43 

Second Mortgage Bonds ------ 48 

First Consolidated Mortgage ----- 49 

Divisional Bonds --------50 

Blanket Mortgage Bonds ------ 51 

Prior Lien Bonds --------52 

Underlying Bonds --------54 

Preference of Above Bonds ----- 55 

Convertible Bonds -------- 56 

Fx tended Bonds --------57 

Sinking Fund Bonds -------58 

Callable Bonds -------- 59 

Collateral Trust Bonds ------ 60 

Guaranteed Bonds ------- 61 

Equipment Bonds --------62 

Terminal Bonds --------63 

Land Grant Bonds -------64 

Refunding Bonds -------- 65 

Short Term Notes -------- 66 

Steam.ship Bonds -------- 6S 



CONTENTS— Continued 

Page 
Express Company Bonds ------ 69 

Street Railway Bonds -------70 

Electric Light Bonds -------71 

Water Power Bonds -------71 

Gas Bonds ---------76 

Water Bonds ---------76 

Telephone and Telegraph Bonds 77 

Timber Bonds --------78 

Coal and Mining Bonds ------ 79 

Irrigation Bonds --------79 

CHAPTER III.— CORPORATIONS 

Corporations ---------83 

Corporation Laws --------83 

Organization --------- 84 

Private Corporations -------85 

Charter ----------85 

Certificate of Incorporation ----- 86 

Issue of Stock --------86 

Share of Stock --------87 

Two Classes of Stock ------- 87 

Right to Vote Stock ------- 89 

Reports ----------90 

Preferred Stock - • - - - - - - - 91 

Guaranteed Stocks ------- 92 

Difference Between Bonds and Stocks 93 

Stock Exchanges --------94 

Rules, of Stock Exchanges ----- 95 

Application for Listing - - - - - - 96 

Unlisted Securities -------98 

CHAPTER IV.— MORTGAGES 

Mortgages ---------- 103 

First Mortgage Real Estate Bonds - 106 

Two Classes of Real Estate Bonds - - - 107 

Buying Real Estate ------- 109 

Buying Improved Income Property - 109 

CHAPTER V.— PARTNERSHIPS 

Partnerships ---------115 

CHAPTER VI.— CONCLUSION 

Remarks in Conclusion ------ 121 



PRELIMINARY 






Do not Read this Book but once and 
Cast it Aside. 

This is a Permanent Reference Work. 

It Means Dollars and Cents to You. 

It Must be Studied Conscientiously. 



CHAPTER I. 

Foreword 

The object sought and the value 
claimed for this compilation is based 
upon the assumption that information, 
which hundreds of people have actu- 
ally asked for, concerning stocks, bonds 
and all kinds of securities, may be of 
interest and helpful to thousands of 
others. Studious application to the 
teachings given and a careful and per- 
sistent adaptation of the same, when- 
ever one is approached with investment 
offerings, will unquestionably minimize 
the elements of risk and avert the dan- 
gers of loss. 

Millions of dollars worth of stocks 
and bonds for new enterprises are 
yearly offered for sale and a proper 

Page 9 



Fundamental Investment Principles 

selection is, in itself, a difficult task, es- 
pecially for the inexperienced; becom- 
ing even more complicated when the 
requirements to suit the circumstances 
of the individual investor are taken into 
consideration. What will meet the de- 
mands of the rich rancher will not be 
suited for the savings of a small mer- 
chant or of a teacher. Some desire an 
investment for a long period — others 
prefer short term securities, for the tem- 
porary employment of their funds. 

The principles of investing are set 
forth herein as simply as possible in 
plain, concise lay language, to enable 
those who take the ordinary precau- 
tions, to avoid the many pitfalls with 
which they are confronted in search of 
a larger interest income than that of- 
fered by savings banks. 

In these days we find a most exten- 
sive range in offerings of investments. 
Everything from fraudulent business 
ventures to government bonds is trade- 
marked "An Investment." It is re- 

Page 10 



F u n d a mental Invest m ent P ri n c i pi e s 

markable that the public does not dis- 
criminate between real, conservative, 
carefully chosen securities and some of 
the most impossible schemes. 

Men and women practice economy 
and self restraint for years in order to 
store up a competence and accumulate 
their savings for use in old age; yet 
hundreds of these people meet with 
financial ruin because of some scheme 
which promises a magical transforma- 
tion of their savings into untold riches. 

The tendency to get something for 
nothing, a desire for exceptional bar- 
gains and the acquirement of sudden 
wealth, is deeply rooted. Although a 
great many unscrupulous parties are 
frequently exposed by prosecution, et 
cetera, there are always some persons 
quite ready to risk their savings on 
apparent investments which promise 
to work wonders and multiply money 
hourly. 

Speculation is nothing but pure un- 
adulterated gambling and covers every- 

Page 11 



Fundamental Investment Principles 

thing which has no proven value. It 
should be absolutely discountenanced. 
It includes all moneys advanced to en- 
terprises to be created, to alleged dis- 
coveries, to uninvestigated ventures, to 
unpatented inventions and to companies 
in the course of formation. 

Obviously, therefore, persons with 
only small and moderate means should 
place their savings in a bank, the only 
logical place, until enough money with 
which to buy a conservative bond has 
been accumulated. To find a good sav- 
ings bank is not very difficult, but in 
any savings bank there is less risk than 
in the majority of so-called investments. 
It does not need a mathematical demon- 
stration to show that the interest paid 
by savings institutions is of necessity 
small. The low rate of interest is proof 
of their excellence. Avoid savings banks 
which offer an unusual interest ; in other 
words, more than three or four percent, 
because banks offering a greater rate 
are apt to be unsound. 

Page 12 



J, 



F u n d a m ental I n vest m c nt Principles 



General Remarks on the First Ac- 
cumulation of Funds 



Savings institutions cannot pay a 
large rate of interest, as their invest- 
ments are regulated, restricted and pre- 
scribed by special laws in most states 
and the list of their investments con- 
tains only approved securities. How- 
ever, the very fact that a security is 
legal for savings banks investments, 
does not necessarily insure absolute se- 
curity. For instance, in the New Eng- 
land States securities of railroads oper- 
ating in that territory were legal for 
savings banks for years but today are 
regarded as a speculation rather than 
an investment. In considering savings 
banks, those with good, careful, con- 
servative management are to be chosen. 
It is an easy matter to obtain satisfac- 
tory information regarding these. 

When at least five hundred to one 
thousand dollars has been accumulated, 
it is advisable to look for a time-tested, 

Page 13 



Fundamental Investment Principles 

substantial investment which provides a 
larger income than may be secured from 
the rate of interest paid on savings 
banks deposits. It cannot be too 
strongly emphasized, that when such a 
step is anticipated, one should devote 
considerable attention to the indispen- 
sable elements of safety and establish 
conclusively, the stability of the enter- 
prise about to be selected. Do not omit 
these precautions, otherwise your ven- 
ture may prove disastrous. Acquire 
and collect the most complete informa- 
tion possible. Remove the veil and re- 
veal the reality. These basic considera- 
tions comprise the fundamental steps 
which prevent regret, worry and loss. 
Place insistence on safety of princi- 
pal above everything else, for this must 
be the determining factor at all times, 
notwithstanding that an attractive rate 
of interest may be offered. Do not allow 
the interest rate to influence you in 
your selection. 

Page 14s 



F u n (I omental I n vest m cut Pr i n ci pies 

Remember, it was difficult to save the 
nucleus of the principal. Follow these 
suggestions and study the following 
questions constantly, applying them to 
investment offerings as the keynote to 
the selection of a safe, sane and desir- 
able investment. 

Test Questions 

1 Under what laws is the charter 
granted? 

2 Why is the company incorporated? 

3 Is the business legitimate and has it 
real merits, or is it visionary? 

4 Are you familiar with the business? 

5 Is this concern a new venture or in 
the course of construction? 

6 Has there ever been a failure in this 
company or is there a great danger 
of failure in similar companies. 

7 Does the business pay in other lo- 
calities? 

8 Are there appreciable risks? 

Page 15 



Fundamental Investment Principles 

9 Are there large companies with 
which to compete? 

10 Why is the business more advan- 
tageous than that of its competitors? 

11 Is the company manufacturing ne- 
cessities or luxuries which are in 
general use? A concern manufac- 
turing luxuries may not be able to 
pay dividends on account of greatly 
reduced earnings during a business 
depression. 

12 How large is the capital? 

13 How many shares have been sold 
and paid for, traded in, given away 
as bonus or exchanges for property, 
patents (there are many pitfalls in 
patents even if allowed by the gov- 
ernment ) , trademarks, charter 
rights, franchises, and goodwill? 
This last asset being a rather uncer- 
tain quantity. 

14 If shares have been sold, did they 
bring a full price; in other words, 
was the par value of the shares real- 

Page 16 



Fundamental Investment Principles 

ized and who received the money 
which was paid for such shares? 
\o How much stock is subscribed for 
and can all of the stock be sold? 

16 What assurance exists that sufficient 
capital is available to carry on the 
business successfully and adequate- 
ly? A large percentage of failures 
is attributed to the lack of capital. 

17 Is there any liability to the stock? 
Never buy industrial stocks if the 
shares are assessable. All bank 
stocks carry liability equal to twice 
the par value of shares. 

18 Has the company liabilities? 

19 Of what do the assets consist? 

20 Is the nature of the business a risk 
or is it of a perpetual nature? 

21 Is there any doubt as to the market- 
ability of the finished product? 

22 Can the raw material be easily pro- 
cured ? 

23 Where is the source of the raw ma- 
terial and who controls its output? 

Page IT 



Fundamental Investment Principles 

It is important to determine whether 
or not competitive companies con- 
trol or have an interest in the raw 
material supply. 

24 Do items enter in, such as long dray- 
age, et cetera, which may make the 
prices higher than competitive 
goods, and so retard their sale? 

25 Is the output uniform? If not, can 
other articles be manufactured so 
that the organization may continue 
work during slack seasons? 

26 Is there a steady demand for the 
goods produced? 

27 What are the labor conditions ; have 
there been any difficulties, strikes, 
et cetera, in the community where 
the enterprise is located? Is the 
company paying lower wages than 
competing companies, which may 
cause strikes later? 

28 Can sufficient help be had to carry 
out the enterprise without hin- 
drance? 

Page 18 



Fundamental Investment Principles 

29 Are the freight rates prohibitive, 
and will they influence the price of 
the finished article? 

30 Does the possibility exist that the 
Interstate Commerce Commission 
will interfere with rates or regulate 
them so that the earning of divi- 
dends will be practically impossible? 
This pertains especially to the case 
in steam and electric railroads, tele- 
phone, electric light and gas com- 
panies. 

31 Could tariff laws or special reve- 
nues upset former calculations as to 
profit ? 

32 Is the company involved in law 
suits? If so, are amounts set aside 
to provide for such contingencies? 
This last item would show foresight 
on the part of the management. 

33 Are sufficient orders on hand, and 
does prospective business warrant 
immediate expectation of dividends? 

34 What are the prospects of paying 
dividends? 

Page 19 



Fundamental Investment Principles 

35 If the company has property has 
there been an examination of the 
title by prominent attorneys and has 
it been found clear? Are the titles 
insured? 

36 Are there mortgages, and if so, who 
holds them? 

37 What interest do they bear and 
when do they mature? 

38 Do these mortgages decrease the 
value of the stock materially? 

39 Is there an existing bond issue con- 
veying all the property and other 
assets to a trustee? 

40 Has the property been impartially 
appraised by competent parties? 

41 Have the books been audited by 
public accountants? 

42 What are the basis of inventory val- 
uations ? Are they at cost or at mar- 
ket value, and which is the lower? 

43 Do they include any unsalable or 
obsolete articles? If so, is a suffi- 

Page 20 



Fundamental Investment Principles 

cient reserve appropriated to cover 
these i 

44 Is there included an element of an- 
ticipated profit and has proper re- 
serve heen provided against it? 

4T> Does the machinery belong to the 
company or is it leased as in the case 
of shoe factories, where machinery 
is only leased? 

40 If the property consists of factory 
equipment, how much may be real- 
ized if auctioned piecemeal? Re- 
member, machinery, buildings, et 
cetera, of factories have little value 
except to similar enterprises or as a 
going concern; their value depend- 
ing on their use. 

47 Is the equipment new? If old, how 
much has the company written off 
yearly for depreciation? 

48 What is the amount of liquid as- 
sets, that is, the excess of current 
assets over the current liabilities ex- 
elusive of the amount of bills pay- 
able? 

Page 21 



Fundamental Investment Principles 

49 What is the proportion of the in- 
terest of stockholders as compared 
to that of note holders? 

50 How large are the accounts pay- 
able and receivable? 

51 Are all accounts receivable collect- 
ible? 

52 Are they secured? 

58 How much merchandise is on hand? 

54 How much finished product and 
how much raw material? 

55 Does the company issue periodical 
statements of its earnings? 

56 If an old business, is it to be en- 
larged? You should know if the 
money paid in for new shares will 
be used to wipe out an old indebt- 
edness. 

57 If the business is an outgrowth of 
another business or a consolidation 
or reorganization of several con- 
cerns, how is the present value of the 
assets to be gauged? Consolidation 
of companies is frequently accom- 
panied by a large increase in capi- 

Page 22 



Fundamental Invest m ent Principles 

talization; as for instance in the 
United States Steel Company, the 
Woolworth Company, et cetera. 
Competing companies are consoli- 
dated for the purpose of eliminating 
competition, to minimize expenses, 
reduce the cost of operation, to in- 
troduce more economical adminis- 
tration, et cetera. 

58 Has the business paid profits prior 
to its reorganization, enlargement or 
incorporation? 

59 How much commission is paid for 
selling stocks and bonds of this com- 
pany ? 

60 Who owns the controlling interest? 

01 In what state of repair and condi- 
tion is the property? 

02 Do the preferred stockholders en- 
joy the right to vote? 

88 Are they to be consulted before a 
larger indebtedness is to be incurred, 
sucli as bonds, mortgages, et cetera. 

04 If the preferred stockholders are 
not allowed the right to vote at the 

Page 23 



Fundamental Investment Principles 

annual stockholders meeting, will 
they receive this privilege in ac- 
cordance with the by-laws, if the 
dividends are not paid? 

65 What privileges does the preferred 
stock enjoy? 

66 May dividends be paid on the com- 
mon stock which would reduce the 
total value of the net quick assets? 

67 May the preferred stock be in- 
creased without the consent of the 
old holders of preferred stocks ? 

68 Are the dividends of the preferred 
stock cumulative? 

69 Have the officials connected with 
the company been failures in other 
concerns? Success or failure of a 
venture depends largely on the abil- 
ity of the management. 

70 Are the officers of the company com- 
petent, conservative business men? 

71 Is the person assigned as treasurer 
capable and responsible and is he 
properly bonded? 

Page 24 



Fundamental Investment Principles 

72 Are the dividends to be paid seem- 
ingly high? Companies which must 
pay an abnormally high interest to 
procure the necessary capital may 
be weak in credit, or it may be diffi- 
cult to finance the enterprise. 

Fundamental Considerations 

Apply to all offerings the strictest 
test and eliminate all speculative factors. 
In considering a suitable investment do 
not seek a bargain. Never buy because 
you can do so at a discount. If a com- 
pany is in poor financial condition, its 
securities will ordinarily sell below par 
and such being the case, a bonus will be 
offered by way of inducement to buy, 
which will give the purchaser either the 
par value at redemption or an amount 
above par. 

Scrutinize carefully every offering. 
Xo one will give something for nothing. 
Charity motives do not enter into busi- 
ness transactions. Confidence, trust 

Page 25 



Fundamental Investment Principles 

and faith are not convincing arguments. 
Make the most stringent investigation 
and be sure you receive the most com- 
plete information. Determine accu- 
rately the reliance to be placed upon all 
statements. Of equal importance is the 
asking of references and a cultivation of 
the habit of looking them up. 

In fact, verify all statements regard- 
ing the salesmen and broker of the bond 
house offering you investments. Never 
jump at conclusions. Do not risk your 
savings in any investment without first 
having made the most exhaustive and 
painstaking investigation. 

Do not misjudge opinions, expecta- 
tions and mere assurances expressed in 
circulars and pamphlets. Decline to ac- 
cept them for cold facts. A Prospectus 
is a temptingly printed circular for the 
purpose of attracting you. 

The general plan of an investment 
may be meritorious; it may appeal to 
you, but do not make your decision 
when your enthusiasm is at its height; 

Page 26 



Fundamental Investment Principles 

hesitate and familiarize yourself thor- 
oughly with the details. Never act on 
the spur of the moment. Do not feel 
assured that you have found an unusu- 
ally profitable investment. 

The man of large fortune, who has 
the greater part safely invested in 
sound securities, may be able to gamble 
a little on new ventures. That is, he 
may buy stock, to a limited extent, in 
companies which have an apparently 
prosperous future. But the man who 
lias but limited means cannot afford to 
take such a chance. He must be safe 
first. The prospects of large profits 
must not lure him. Good bonds should 
attract him rather than stocks. 

Exercise the utmost precaution when 
considering the purchase of mine or 
oil stocks, in fact, abundant reasons 
exist why they should never be bought. 
There is an ever-prevailing risk in in- 
vestments of this character, for they 
are constantly consuming themselves. 
These stocks are usually offered with 

Page 27 



Fundamental Investment Principles 

the plea that the property is located 
near a similar property of established 
value. More money has been lost in 
worthless mines and oil fields than has 
been taken out. There are, of course, 
a great many good gold, silver, copper 
and other mining stocks on the market ; 
but the good ones are not frequently 
offered to the public. 

It is advisable to avoid distant in- 
vestments, for it is difficult and often 
impossible to obtain reliable informa- 
tion concerning them. People in these 
distant localities also have surplus funds 
to invest. Why is the security not of- 
fered there for sale? The securities of 
companies who do not enjoy a wide 
reputation should be avoided. 

Banker's Advice 

When you are about to invest, con- 
sult your banker. Consider his advice. 
He is in the business of investing and 
is better acquainted with the pitfalls. 
When proper precautions are taken in 

Page 28 



Fundamental Investment Principles 

advance little fear need be entertained 
for the safety of the money invested. 

List of Investments Should Be 
Classified 

Diversify your list of investments and 
select one of absolute integrity of both 
principal and interest. There are listed 
and unlisted securities. Reference will 
be made to these later. Be it sufficient 
to mention, the mere fact that securities 
are listed affords no guarantee that 
they will not fluctuate and that the prin- 
cipal cannot be lost, or in some cases, 
that even the interest will be paid. The 
great advantage of listed securities is 
that they may be more easily negoti- 
ated; but there are cases when a quick 
sale cannot always be made even of 
listed securities. 

Redeemable Securities 

Redeemable securities, commonly 
called bonds, will be considered first. 
Bonds are certificates of indebtedness 

Page 29 



Fundamental Investment Principles 

issued by private corporations, munici- 
pal and government bodies. When a 
government, state, county or munici- 
pality requires money with which to 
build administration buildings, such as 
custom houses, court houses, city halls, 
school houses, water works, sewers, elec- 
tric works (where the same are owned 
by cities or towns), pumping stations, 
et cetera, they issue promises to pay at a 
certain time and to pay interest at 
certain intervals in order to secure the 
necessary funds. These promises are 
certificates of indebtedness and are 
called bonds. 



Page 30 



BONDS 



CHAPTER II. 

Text of a Bond 

The text of a bond should contain: 
the number; amount of the bond; date 
of maturity; promise to pay in gold; 
place of payment; promise to pay in- 
terest; rate of interest; where, when 
and how payable ; amount of total bond 
issue; whether coupon or registered; 
how bond issue is secured ; date of mort- 
gage securing issue; by whom made; 
upon what propertj r ; whether transfer- 
able into other forms; provision for de- 
fault of interest payment; whether re- 
deemable by sinking fund or otherwise ; 
interest and principal to be paid with- 
out tax deduction; whether or not sub- 
ject to earnings; bond signed or in- 
dorsed by trustee under mortgage deed 

Page 33 



Fundamental Investment Principles 



of trust; corporate seal; signed by offi- 
cers of company; date; attestation by 
secretary of company. 

Bonds are to be preferred in the fol- 
lowing order : 

1 Government, state and municipal 
bonds. 

2 Railroad bonds. 

3 Public utility bonds. 

4 Industrial bonds. 

Government, State and Municipal 
Bonds 

Government, state and municipal 
bonds are promissory notes. No prop- 
erty is transferred to a trustee to be 
held in case of default. 

Government, state and municipal 
bonds are divided into three general 
classes, each of which is again subdi- 
vided. No sounder security could be 
conceived than these bonds, still there 
are a few exceptions. 

It should not be overlooked that after 
the Civil War a great many state 

Page 34 



Fundamental Investment Principle 9 

bonds were outstanding, originally is- 
sued by the Southern States, which have 
been legally repudiated and the holders 
of these bonds have lost their money. 
There is nothing better than United 
States Government Bonds, for they are 
regarded as one of the highest and 
safest forms of investment, but the 
meagre income accruing therefrom does 
not make them an ideal investment for 
the individual. 

United States bonds are divided into 
two classes: registered bonds and cou- 
pon bonds. Registered bonds are regis- 
tered in the name of the owner, and if 
such a bond is lost a duplicate will be 
issued upon presentation of satisfac- 
tory evidence. Bonds are transferable, 
but transfers or assignments must be 
witnessed by an officer of a national 
bank, custom house, or some similar fed- 
eral official. These bonds may be ex- 
changed for coupon bonds, but there is 
no law compelling such an exchange. 

A coupon bond, however, is payable 

Page 35 



Fundamental Investment Principles 

to bearer and anyone presenting it is 
recognized as the owner. This form is 
generally preferred by individual in- 
vestors. Bonds should be kept in a safe 
place, preferably a safety deposit box, 
for the coupons, if detached, are the 
equivalent of money. 

The Federal Government requires 
national banks to buy registered govern- 
ment bonds and deposit them with the 
United States Treasurer to secure the 
circulating bank note issue, in amount 
equal to the paid up capital of such 
national bank. United States Govern- 
ment Bonds are also received by the 
Government as security for United 
States deposits. 

The federal government assumes no 
risks and when one sees the statement 
displayed by any bank "United States 
Depository" it does not signify the un- 
usual strength of such an institution, but 
it means that the bank has bought and 
deposited with the United States Treas- 
urer bonds equal in face value to the 

Page 36 



Fundamental Invest m ent P r i neiple % 

moneys deposited by the United States 
government. It indicates that the bank 
has met all requirements prescribed by 
law to receive United States deposits. 
Should the deposits exceed the amount 
of bonds deposited, the excess must be 
immediately forwarded to the nearest 
United States Sub-Treasury. 

State bonds are issued by the various 
states and are well within the lines of 
the safety market. They possess the 
very desirable feature of being ex- 
empted from taxes. 

Municipal bonds embrace : city bonds, 
bonds of incorporated towns, bonds of 
incorporated villages, county bonds, 
township and borough bonds, assess- 
ment and special tax bonds, et cetera. 

The selection of these bonds is more 
difficult. Municipal bonds may run for 
a full term or may be retired serially, 
that is, at different dates. Bonds of 
larger cities are preferable to those of 
smaller towns on account of the inabil- 
ity to market the bonds of the latter. 

Page 37 



Fundamental Investment Principles 

The investigation of municipal bonds 
should cover the following points : Has 
the strict conformance to certain legal 
requirements been properly established? 
Has the town a stable or floating popu- 
lation? Is there any reason why the 
real estate valuation could be fluctuat- 
ing? Are the bonds tax exempt? Are 
they a regular obligation of the com- 
munity or are they special assessment 
or special tax bonds? If they belong to 
the special assessment or special tax 
bond class, are they to become regular 
obligations of the municipality if the 
taxes collected which will benefit the 
property in question are not sufficient 
to pay interest or principal? If they 
are not to become a straight obligation 
of the municipality or if there should 
be reasons to fear some calamity might 
befall the town, such as "caving in" in 
mining districts, the breaking of dams, 
et cetera, they should not be considered. 
Municipal bonds are looked upon as 
an excellent form of security and are 

Page 38 



Fundamental Investment Principles 

a favorite investment for bankers, life 
insurance companies, trustees who ad- 
minister the money of other people, as 
well as private investors. 

Municipal bonds are equally as safe 
as United States Government Bonds, 
for the holder may demand payment of 
principal and interest. These rights of 
municipal bondholders have been re- 
peatedly established by the Supreme 
Court of the United States. Bear in 
mind that a city may be sued, but ac- 
tion cannot be brought against a state 
or the United States without its con- 
sent. 

The issue of all municipal bonds is 
restricted, and payment of principal 
must conform to the statutes of the 
respective states. The accounting of 
municipalities is strictly required by 
law. There are, however, bonds issued 
by municipalities which cause a great 
deal of litigation and should be avoided. 
These are usually bonds issued by cities, 
towns, counties, et cetera, to aid in the 

Page 39 



fundamental Investment Principles 

construction of railroads or in the es- 
tablishment of new industries. This is 
unconstitutional in some states, as for 
example Illinois. 

Only such municipal bonds as state 
specifically that they are legal and form 
a constitutional obligation of a com- 
munity, should be bought. The total 
amount of the bond issue plus all out- 
standing indebtedness must not exceed 
the tax valuation of the property of 
the municipality. 

There is no safer form of investment 
than United States Government Bonds. 
If the investor is satisfied with a small 
rate of interest, he need look no further, 
for he is safe beyond question and may 
realize the full value of these bonds at 
any time. 

State bonds are very desirable and 
at once safe and attractive. They jus- 
tify almost any amount of money, for 
they may be sold readily and always 
are good collateral. 



Page 40 



Fundamental Investment Principles 

Municipal bonds are rated as among 
the best possible investments. Select 
only those of larger cities, especially if 
you may wish to dispose of them 
quickly. It is good policy to buy home- 
town, county and borough bonds. In 
fact, there should be no hesitation, be- 
cause the individual investor may sat- 
isfy himself easily about his own com- 
munity. He is informed as to the tax- 
ation value, the legality of the vote 
taken to issue the bonds, et cetera; in 
fact, to all requirements prescribed by 
law. 

These investments are generally for 
a long period and while these bonds are 
not as quickly salable as state or gov- 
ernment bonds, one may at all times 
feel assured of the safety of his invest- 
ment. Subsequent reverses are not to 
be feared. The advice of your banker 
will guide you in regard to the legal 
requirements and he can inform you if 
they have been issued in accordance 
with the state statutes. 

Page 41 



Fundamental Investment Principles 

Corporation Bonds 

Corporation bonds will next be con- 
sidered. These bonds fall into three dis- 
tinct classes : Transportation, public 
utilities and industrial bonds. These 
three classes are again subdivided as 
follows: under transportation bonds 
come railroad, steamship and express 
company bonds. Under public utili- 
ties: street railroads, electric light and 
water power bonds, gas bonds, water 
bonds, telephone and telegraph bonds. 
Under industrial bonds: timber, coal 
and mining bonds, irrigation bonds and 
real estate bonds. 

Corporations are empowered to bor- 
row money and to issue bonds. How- 
ever, there is a prescribed limit upon 
the amount which the corporation may 
borrow in most states. A corporation 
also has the right to issue unsecured 
bonds, but no corporation may issue per- 
petual bonds. The bonds must have a 
clause to the effect that the principal 
will be repaid at a stated time. 

Page 42 



Fundamental Investment Principles 

Nearly all corporation bonds have at- 
tached coupons which represent the in- 
terest on the bond itself and are usually 
payable semi-annually or annually. 
These coupons are a form of promissory 
note payable to bearer, specifying the 
amount of the coupon, the bank where 
payable, and signed by the treasurer 
of the company by means of an en- 
graved signature. These coupons are 
negotiable. 

It is always advisable to make the 
most rigid investigation of all offerings 
which come under the head of corpora- 
tion bonds. While in the majority of 
cases they represent good and substan- 
tial investments, there are some which 
are merely speculations; some being 
merely promises to pay. 

The principal questions to ask before 
investing in bonds are the following: 

What is the character of the corpora- 
tion issuing these bonds? What is the 
purpose of the issue? For what will 
the proceeds be used? Corporations are 

Page 43 



Fundamental Investment Principles 

permitted under the law to use funds 
obtained from a certain mortgage for 
some entirely different purpose, but this 
is restricted by statute in some states to 
the purpose stated in the mortgage, but 
bona fide purchasers will be protected. 
What is the security given in order to 
insure payment of principal? When 
will the bonds be retired? What is the 
sinking fund provision? What prop- 
erty has been turned over to the trustee 
to be held for the bondholders? Where 
are the coupons to be paid? What is the 
denomination of such bonds? What is 
the rate of interest? Has the legality 
of the bonds been approved by compe- 
tent attorneys? What are the possi- 
bilities of prompt payment of interest? 
Are the franchises permanent? How 
about the right of way? Is the com- 
pany under the supervision of a Public 
Utilities Commission, or if a railroad, 
The Interstate Commerce Commission? 
There is a greater variety of bonds 
offered by railroads than by any other 

Page 44 



Fundamental Invest merit Pri n e I pi e s 

corporation. The constant enlargement 
of these companies necessitates new 
funds continually. Each bond offered 
for sale must be carefully scrutinized. 
It is not possible to generalize in these 
securities. The best guide, however, is 
formed by the two following questions : 
Has the corporation, or the under- 
taking for which this bond is issued, 
existed a sufficient length of time in 
order to enable it to make specific 
claims as to its earning power? Is it 
in the state of construction; that is, is 
it undeveloped or not long enough in 
existence so as to permit the forming 
of conclusions? 

Subdivision of Railroad Bonds 

Railroad bonds are subdivided as 

follows: 

1st: Collateral trust bonds, railway 
trust bonds, collateral notes, col- 
lateral mortgage bonds, mortgage 
collateral trust bonds, first mort- 

Page 45 



Fundamental Investment Principles 

gage trust bonds, collateral income 
bonds and trust certificates. All 
these bonds are known to the trade 
as paper collateral bonds. 

2nd : Car trust certificates, car trust 
bonds and equipment bonds. These 
bonds are known to the trade as 
rolling stock securities. 

3rd: Railroad, real estate bonds, land 
grant bonds and terminal bonds. 
These bonds are known as prop- 
er ty- bonds. 

4th : Divisional bonds, extension bonds, 
refunding and extension bonds, 
purchase lien extension bonds, 
bridge extension bonds, dock ex- 
tension bonds, wharf extension 
bonds and terminal extension 
bonds. These bonds are known as 
mortgage incidents bonds. 

5th: Prior lien bonds, underlying 
bonds, overlying bonds, senior is- 
sues, junior issues, first mortgage 
bonds, refunding first mortgage 
bonds, first refunding bonds, first 

Page 46 



Fundamental I nv e § t in e n t P r i n c i pi e s 

and refunding mortgage bonds, 
consolidated mortgage bonds, con- 
solidated and refunding mortgage 
bonds, consolidated first mortgage 
bonds, first and consolidated mort- 
gage bonds, first consolidated 
mortgage bond, general mortgage 
bond, first general mortgage bond, 
general and first mortgage bond, 
first lien and mortgage bonds. 
6th: Debenture bonds and mortgage 
and debenture bonds. 
It is impossible in limited space to 
give a complete account of the numer- 
ous bonds employed by the various rail- 
roads. No attempt is made in this work 
to give, in an elaborate, comprehensive 
manner, all the information pertaining 
to the different bond issues. Conse- 
quently only a few generally descrip- 
tive characteristics will be discussed, 
referring only to the most important 
points so that prevailing popular mis- 
conceptions may be cleared by creating 
an understanding of the peculiarities of 

Page 47 



Fundamental Investment Principles 

bonds and assist in making a proper 
choice from the host of offerings. 

First Mortgage Bonds 

Railroad first mortgage bonds are 
secured by a first mortgage on the fin- 
ished part of a railroad. In order that 
the nature of this indebtedness may be 
positively determined and to establish 
the desirable qualities and superiority, 
as far as an absolute first mortgage is 
concerned, one should ascertain the pre- 
cise text of the mortgage which is in 
possession of the trustee. A copy of 
the mortgage and legal opinion may 
always be obtained, but emphasis should 
be laid on the exact definition of the 
bonds, as the name "FIRST Mortgage 
Bonds" alone, indicates nothing, as most 
of them are really only secondary and 
follow prior and underlying lien bonds. 
They have lost the quality of security 
which appears in real estate mortgages. 

Second Mortgage Bonds 

On account of the inadequacy of the 

Page 48 



Fundamental I nv c s t in cut Pri n c i pi c s 

original capitalization, second mortgage 
bonds are created. The original cost 
of the railroad could not be ascertained 
and the funds received from the first 
mortgage bond issue being exhausted 
before completion of the construction 
work as originally planned, supple- 
mentary financing must be resorted to 
and junior liens created. The several 
varieties of these liens are divided into 
consolidated and refunding bonds and 
are called second mortgage bonds. 

First Consolidated Mortgage 

Let us suppose a certain railroad is 
completed and actually in operation. In 
order to meet the rapidly increasing de- 
mand for transportation and to convert 
uncultivated sections into rich produc- 
ing farms, the railroad has thrust upon 
itself the problem of further building 
and extending its lines. 

The demand for money with which to 
finance extensions becomes such a bur- 
den upon the road that it is obliged to 

Page 40 



Fundamental Investment Principles 

create neAV funds. In such an instance 
the railroad overcomes the lack of cap- 
ital by issuing a first mortgage on the 
next extension. The security attach- 
ing to the bond, a first mortgage on 
the unfinished or proposed extension, 
is not sufficient to make the bond at- 
tractive; consequently, in order to pro- 
tect the investor and to meet the situa- 
tion, a second mortgage on the already 
completed and operating section of the 
property is added to the first mortgage 
on the extension. 

Similarly to the consolidation of 
mortgages, this new indebtedness re- 
ceives its name — first consolidated 
mortgage bond. 

Divisional Bonds 

The need of money in railroad financ- 
ing is almost without limit and often it 
becomes necessary to issue second mort- 
gage bonds on the old property before 
an extension may be built. 

In such a case a railroad commonly 

Page 50 



F ■ Jid a mental I n vestment Principles 

resorts to a first mortgage on the addi- 
tional mileage, considering the protec- 
tion to the investor ample and attrac- 
tive, thereby em ily excluding a 
second mortgage on the old property. 
.V bond so issued is called a divisional 
bond. 

The first mortgage on the old prop- 
erty may contain provisions covering all 
future properties, and if such conditions 
are stipulated, the only solution is the 
creation of a new company and the 
bonds of this new company cover the 
extension only. The investor should 
ascertain the exact condition of these 
bonds in order to prevent buying a 
mere construction bond. 

Blanket Mortgage Bonds 

Railroads extend their systems fro 
time to time so that the demands for 
transportation facilities of grow 
communities may be met. In order to 
handle the additional business, new 
tracks, spurs, stations, ct cetera, must be 

Page 51 



Fundamental Investment Principles 

constructed. If all prior funds have 
been exhausted, the only method re- 
maining whereby additional capital may 
be acquired is the creation of a mort- 
gage to cover the entire property as 
well as the extension. This mortgage 
is subject to all outstanding mort- 
gages. The security consists of a sec- 
ond mortgage on the extension, if the 
prior issue was a consolidated mort- 
gage, or a third mortgage, if there was 
a first and second mortgage on the 
original property. These bonds are de- 
fined as blanket mortgage bonds. 

Prior Lien Bonds 

In explanation of prior lien bonds, 
let us assume that a company is finan- 
cially embarrassed, due to mismanage- 
ment and miscalculation on the part of 
the officers, and because of this, further 
bonds are unsalable. Some means of 
meeting obligations must be devised so 
that the unavoidable, serious and de- 
plorable state which may result in in- 

Page 52 



Fundamental Investment Principles 

solvency or reorganization may be 
escaped. 

In such a predicament, a meeting will 
be called of the holders of all outstand- 
ing indebtedness, especially bonds, to 
devise some means to meet the emerg- 
ency and at the same time protect cred- 
itors. It is reasonable to suppose that 
all the holders will conclude to pass a 
resolution authorizing the directors of 
the railroad to issue a new bond, called 
a prior lien bond. The funds raised 
therefrom will adjust all difficulties. 

The holders of such prior lien bonds 
have a decided advantage as their in- 
terests are well protected and because 
such bonds, under the agreement en- 
tered into by the bondholders, are to 
be paid and retired before any others. 
However, prior lien bonds cannot be 
issued without the unanimous consent 
of the holders of all the bonds issued, 
as by tliis arrangement they impair the 
security of their holdings, their bonds 
depreciate in value and their indebted- 



Fundamental Investment Principles 

ness automatically becomes secondary; 
but it is usually stipulated that prior 
lien bonds are to mature as quickly as 
the finances of the railroad will warrant 
such action. In this manner bank- 
ruptcy may be avoided. 

Underlying Bonds 

The term underlying bond, as the 
name implies, has reference to a bond 
which enjoys a degree of protection 
lacking in subsequent issues. The 
owner of these bonds is assured pay- 
ment when holders of subsequent is- 
sues may lose. That is, underlying 
bonds are created first in point of time, 
and such being the case, they are prior 
liens and are paid first. Subsequent 
bonds are subject to them. Underlying 
bonds of corporations w T hich issue regu- 
lar annual reports and which have been 
active for at least twenty years should 
be preferred. 

Holders of underlying bonds must 
have satisfaction at all events, even 

Page 54 



F u n d a mental Invest m e n t P f i n ci pies 

though it be to the prejudice of the 
holders of junior securities. For this 
reason the market value of junior bond 
issues should be determined. 

Preference of Above Bonds 

Of the bonds so far discussed the in- 
trinsic value of first mortgage bonds of 
large railroads is greater than that of 
any other bond and a very safe invest- 
ment, especially when they include all 
the properties, franchises and other spe- 
cial rights. 

First mortgage bonds on new prop- 
erties are more or less hazardous. Even 
though they are called first mortgage 
bonds, they are in reality construction 
bonds. These bonds are not regarded 
as a staple investment and it is there- 
fore seldom good policy to buy them. 

Prior lien bonds constitute an excel- 
lent investment. Necessity obliges the 
holders of the older bond issues to pro- 
tect prior lien bonds. For those seek- 

Page 55 



Fundamental Investment Principles 

inff a good investment these bonds are 
recommended. 

A consolidated bond, when issued by 
a large corporation of established repu- 
tation, may be accepted as a fair invest- 
ment, as it is substantially backed by 
various other following mortgages. 

One can, as a general rule, be guided 
by the rate of interest which a bond 
pays. The best ones, those tested by 
time, will yield only a small interest, 
and if a greater return is desired a 
larger risk must be assumed. There are 
naturally buyers for all bonds, as many 
investors prefer securities affording op- 
portunities for speculative gain. 

Convertible Bonds 

The demand for money may develop 
very suddenly and at most inopportune 
times. Business may be languishing 
and capital hiding its resources, causing 
a severe depression or panic. At such 
times high interest rates are demanded. 
The situation is a difficult one with 

Page 56 



Fundamental Investment Principle* 

which to cope, and in order to protect 
other investors, convertible bonds are 
issued. 

The advantage of these bonds is that 
they may be changed at a later date for 
stock. As an illustration let us assume 
that this convertible bond bears the 
same rate of interest at the time of issue 
as the stock of the railroad. In the 
more prosperous years which follow, the 
dividend rate on the stock may increase 
considerably. The bondholder has the 
right to exchange his bonds for stock 
and to participate in the earnings. 

Convertible bonds are very seldom 
secured by mortgage, but may be very 
profitable to those who possess a de- 
tailed knowledge of stock exchange 
transactions. 

Extended Bonds 

When the date of maturity of the 
obligations of a company has arrived 
it is required either to pay them or re- 
deem its indebtedness by extending its 

• 57 



Fundamental Investment Principles 

existing bonds. If it has no accumu- 
lated funds, nor any means of meeting 
its obligations or, owing to the prohibi- 
tive interest rates prevailing during bus- 
iness depressions, the company refunds 
the old bonds by a new issue, known as 
extended bonds. The reason for issu- 
ing such bonds is that it does not wish 
to hamper the progress of the road to 
a great extent by borrowing at unfavor- 
able times at exorbitant interest rates. 
These bonds are often classed as specu- 
lative bonds as the security back of them 
is not quite as substantial as others. 

Sinking Fund Bonds 

There is another group of bonds, 
called sinking fund bonds, which divide 
themselves into two classes. They are 
extended bonds with sinking fund 
clause and a straight mortgage obliga- 
tion with a sinking fund provision. 

A sinking fund is a sum set aside for 
the fractional discharge of the existing 

Page 58 



Fundamental I n v est men t P r i n ci pi e s 

indebtedness or the serial retirement of 
bonds. This constitutes a great pro- 
tect ion to the bondholders but does not 
assure absolute safety. Such sums are 
usually paid to the trustee of the bond. 

Sinking fund bonds are especially 
desirable and should be a requirement 
in most industrial bonds, such as timber, 
coal, quarry, mining, steamship, land 
grant, paper company bonds — in fact, 
in every bond where the property se- 
curing the bond will depreciate in value. 
However, the sinking fund is not of 
such great importance where the pro- 
ceeds of the bond are to be used for the 
purchase of permanent undertakings 
which will eventually increase in value. 

Callable Bonds 

Any bond containing a clause reserv- 
ing the right of total or partial redemp- 
tion is a callable bond. It is usually de- 
cided by lot when and which bond shall 
be called. 

Page 59 



Fundamental Investment Principles 

Collateral Trust Bonds 

Of the immense railroad systems ex- 
isting today only a very few were built 
by one original company. The major- 
ity of systems have been built up en- 
tirely through the consolidation of va- 
rious lines. 

Collateral trust bonds, as they are 
termed, have served as a very effective 
aid in financing such consolidations. 
Under consolidation agreements the 
stocks or bonds of subsidiary or exten- 
sion companies or branches of the rail- 
road are deposited with a trustee as 
security for an issue of collateral trust 
bonds. 

When such consolidations are made 
an opportunity exists to make a bond 
issue considerably larger than the actual 
value of the property. The temptation 
to inflate the value of the property ac- 
quired is often so convenient and is so 
frequently resorted to that one should 
use the utmost care in the purchase of 

Page 60 



Fundamental I n vest incut Principles 

collateral trust bonds. Another distinct 
feature deserves mention. The interest 
payment of collateral trust bonds de- 
pends upon the dividends paid by the 
bonds and stocks mortgaged and de- 
posited with a trustee. The purchase of 
these bonds is not advisable for those 
who depend upon the income to be de- 
rived at stated periods. 

Guaranteed Bonds 

Often a railroad purchases or leases 
another road and not wishing to issue 
collateral trust bonds, guarantees the 
outstanding bonds of the road so ac- 
quired. Unlike guaranteed stock, where 
only the interest is guaranteed, the 
principal as well as the interest is guar- 
anteed in these bonds. The nature of 
the guarantee is stipulated. If the com- 
pany, which adds its guarantee to the 
bonds, is of good standing, such bonds 
are, because of this additional security, 
looked upon with great favor and con- 
stitute a safe investment. 

Page 61 



Fundamental Investment Principles 

Equipment Bonds 

There is another class of bonds 
known as equipment bonds. These 
bonds represent the immediate assets 
of the company as defined by the In- 
terstate Commerce Commission. The 
equipment consists of steam and electric 
locomotives, passenger and freight cars, 
work cars, machinery and tools for con- 
struction or repair, ferry boats, steam- 
ships, et cetera. They are a direct ob- 
ligation of the road or the company 
owning them secured by the aforemen- 
tioned equipment. 

When steady uninterrupted growth 
necessitates the enlarging of the equip- 
ment, the company pays for this on the 
installment plan; in other words, issues 
equipment bonds which are retired seri- 
ally. These bonds generally contain a 
clause which states that the deteriorated 
or obsolete equipment shall be replaced. 

In order that the bondholders may be 
protected from losses the equipment 
must be insured. 

Page 62 



Fundamental Investment Principles 

While equipment bonds do not rep- 
resent a bonded debt, nevertheless they 
are good bonds to buy, especially since 
the railroads must have equipment and 
these bonds are issued to pay for it. 
There is no case on record where such 
a bond issue has defaulted in payments, 
even though the interest paid is some- 
what higher than on mortgage bonds. 

Terminal Bonds 

As a means of more readily obtain- 
ing additional capital for the purpose 
of building terminals, railroads often 
mortgage the various properties belong- 
ing to them, such as stations, offices, 
shops, engine houses and connecting 
real estate. 

First mortgages on these various 
properties secure the money so re- 
ceived, and the bonds issued are called 
terminal bonds. These bonds are very 
desirable, especially when the terminals 
are used by other railroads, as there is 

Page 63 



Fundamental Investment Principles 

an absolute assurance of their payment 
by means of the contracted rentals. A 
great deal of money is spent on termi- 
nals and their approaches by different 
railroads. These terminals when not 
used by other lines do not produce 
revenue and are necessary luxuries. 
These bonds are generally considered a 
good investment. 

Land Grant Bonds 

In the early railroad days when 
transportation methods were limited, 
the government came to the aid of the 
railroads and donated certain lands to 
induce them to extend their lines 
through undeveloped, sparsely settled 
territory. There existed little assur- 
ance of immediate return, as the pros- 
pect of a large volume of freight busi- 
ness was lacking. 

When the railroads began building 
these extensions they did not offer the 
lands received from the government 

Page 64 



Fundamental Investment Principle? 

for sale, as their value was not very 
high. Instead they mortgaged them 
for the purpose of providing funds with 
which to construct their railroads. Land 
grant bonds were accordingly issued so 
as to hold the fee for a future increase 
in value. In the course of time the 
country became settled and the antici- 
pated increase in value was material- 
ized. The granted tracts were sold, 
and with the proceeds, the outstanding 
land grant mortgage bonds were re- 
tired. 

While very good, very few T of these 
bonds are at present outstanding and 
consequently little thought need be 
given them. 

Refunding Bonds 

There are three ways of refunding 
bonds: first, by retiring the old bonds 
and authorizing a new issue. Second, 
retiring existing bonds and issuing 
short term notes in their stead. Third, 
by actual payment of cash. 

Page 65 



Fundamental Investment Principles 

Large railroad companies very often 
have a great number of bond issues out- 
standing, and in order to simplify their 
finances, they readjust them periodical- 
ly by consolidating a number of the 
older issues of bonds, each having a dif- 
ferent name, into one large issue by 
giving a new mortgage which combines 
all the outstanding mortgages. This 
new mortgage is known as a refunding 
bond mortgage. 

As the different bond issues mature 
the holders are asked to surrender the 
bonds which they hold and to accept 
refunding bonds in their stead. 

Refunding bond mortgages are rea- 
sonably safe in most cases. If the mort- 
gage consists of all the property, fran- 
chises, charters, et cetera, which the com- 
pany owns, the purchase of these bonds 
may be generally recommended. 

Short Term Notes 

Short term notes are of comparative- 
ly recent origin. The demand for 

Page 66 



Fundamental Investment Principles 

higher interest rates increases in the 
same proportion as does the cost of liv- 
ing. The largest and best railroad com- 
panies, when in need of immediate funds 
or having maturing obligations, at- 
tempt to avert the payment of excessive 
interest rates, and in anticipation of a 
lower rate, temporarily employ short 
term notes for this purpose. These 
notes are usually secured and, if so, 
may he regarded as safe. 

There is, however, another kind of 
short term note issued for quite a dif- 
ferent reason. Where the earnings for 
a period of years have been larger than 
the fixed expenses and the sale of 
stocks or bonds would not bring the 
necessary results, the company then 
tries to borrow in the open market. 
When notes are issued with the intent 
to avert financial difficulties they should 
be decidedly left alone. Notes of this 
kind are only a form of commercial 
paper, that is, promises to pay issued 
on the credit of the company. Should 

Page 67 



Fundamental Investment Principles 

such notes mature during times of de- 
pression it would spell absolute dis- 
aster. 

Investors who anticipate buying 
short term notes should seek the ad- 
vice of their bankers. Such notes bring 
a high interest return, but are very fluc- 
tuating in price. The selection re- 
quires a careful study of the financial 
condition of the companies issuing 
them. The inference to be drawn is 
that these notes should be evaded un- 
less one is thoroughly conversant with 
such matters. Short term notes are 
also issued by municipalities at times to 
tide over their finances until such time 
as taxes are collected. These notes, 
however, are all taken by one or two 
banks and seldom offered to individual 
investors. 

Steamship Bonds 

Steamship bonds, as the name im- 
plies, are issued by steamship compa- 

Page 68 



Fu ?id a mental Investment Principles 

nies. They consist either of a first mort- 
gage on all boats of the company, or on 
each individual vessel. They should be 
of serial maturity, as the value of ships 
decreases in time, and should have a spe- 
cific clause pertaining to insurance in 
order to protect the holders of such 
bonds from losses. 

The bonds based on mortgages of 
freight steamers are naturally more 
valuable than those issued on luxuri- 
ously equipped passenger liners, as the 
earning quality of a freight steamer is 
greater than that of a boat carrying 
only passengers, or one combining 
freight and passengers. 

These bonds are not looked upon 
with favor by investors seeking con- 
servative holdings. 

Express Company Bonds 

Express company bonds are issued 
by express companies and are first 
mortgages on all their property, includ- 

Page 69 



Fundamental Investment Principles 

ing franchises and charters. The earn- 
ings of express companies have of late 
fallen off considerably, due to the es- 
tablishment of the Parcels Post. One 
should use great caution in buying such 
bonds. 

Street Railway Bonds 

Street railway bonds are usually first 
mortgage bonds issued by street rail- 
way companies. Their desirability as 
an investment depends greatly on the 
magnitude of the system, capitaliza- 
tion, management, the territory served, 
et cetera. The franchise, which is the 
life of such a company, should be a per- 
petual one; otherwise funds invested in 
such bonds are not very secure. 

Street railway bonds of companies 
serving small communities enjoy only a 
local market and do not rank among 
the choicest issues, the only exception to 
this being bonds issued by large com- 
panies of good standing and stability 

Page 70 



Fundamental Investment Principles 

which operate several distinctive sys- 
tems. 

A most exhaustive investigation 
should be prosecuted in order to deter- 
mine the exact standing of such com- 
panies before its bonds are considered 
for purchase. 

Electric Light Bonds 

Bonds of electric light companies 
should be judged by local conditions. 
They often rank very high and may be 
accepted as fairty safe, particularly 
those of companies which operate in the 
larger cities. These companies usually 
enjoy a monopoly and the business is 
well-nigh assured. 

Water Power Bonds 

In the selection of water power bonds 
as a form of investment the greatest 
care should be exercised. While the 
large majority of such bonds are very 

Page 71 



Fundamental Investment Principles 

good and yield a higher rate of interest 
than railroad securities, yet issues ap- 
pear at frequent intervals which are not 
very desirable. 

It is imperative that one becomes 
thoroughly acquainted with all the af- 
fairs of companies the purchase of 
whose bonds is under contemplation. 

Water power companies are divided 
into two classes: companies generating 
power and selling electric current at 
wholesale to other electric light compa- 
nies, and water power companies, con- 
nected with electric light companies 
which generate electricity and sell the 
current directly to the consumer. 

Electric power in itself is worth prac- 
tically nothing unless the plant gener- 
ating it is located in a well settled com- 
munity or in a place where the distance 
to such community is not too great. 

The radius in which electric current 
can be profitably transmitted is ap- 
proximately two hundred miles. There- 
fore, the important feature to which to 

Page 72 



Fundamental Investment Principles 

look when buying water power bonds 
is the absolute conviction that a satis- 
factory market for the current, within 
the prescribed radius, is assured. 

In order to insure the economical op- 
eration of water power companies, 
great dependence must be placed on 
factories which consume the surplus 
power. Selling current for lighting 
purposes only will not allow the accu- 
mulation of necessary sinking funds 
and at the same time pay dividends, 
because the gross consumption of cur- 
rent is too low. In other words, the 
current consumed by factories in the 
day time must be equalized by the night 
consumption for lighting purposes. 

Complete information concerning 
water rights and privileges of water 
companies is essential. Attention is di- 
rected to the fact that minimum water 
stands should be known for a series of 
years past, in order to be assured of 
a sufficient flow during long dry spells. 
To ascertain such water stands, reports 

Page 73 



Fundamental Investment Principles 

from the state as well as the United 
States Geological Survey should be ob- 
tained. These are free of cost. 

The water stand of July, August, 
December and January should be 
taken as a guide to determine the mini- 
mum amount of water in such lakes, 
rivers and streams as may be used in 
the operation of the plant at all times. 

Auxiliary steam power is positively 
necessary where the water supply can- 
not be absolutely depended upon, espe- 
cially in districts subject to droughts. 
It would be a great handicap for com- 
panies having an extensive market for 
current to be unable to give efficient 
service at all times. Accidents may 
happen, and should no provision be 
made against such contingencies, the 
service must be interrupted, resulting in 
considerable loss, even in the loss of the 
charter, where service is discontinued 
for a time. 

The building of dams is another im- 
portant consideration. Dams should al- 

Page 74 



F undo mental Investment Pri n c i pi e s 

ways be built of rock or cement. Wood- 
en dams are unsatisfactory and unde- 
sirable, especially for large projects. In 
constructing dams it is quite necessary 
that the ends are securely anchored to 
avoid "wash-outs" in floods, and also ex- 
pensive delays and losses. 

There are other lurking dangers in 
water power bonds, one of the more 
important of which is the over-capital- 
ization of the company issuing them. 
The other is the issue of bonds while the 
dam and power plant are under con- 
struction, making a rather hazardous 
investment. 

Construction work is not income pro- 
ducing. The undeveloped state of con- 
struction work does not give a guaran- 
tee of the potential earning capacity. 
Therefore, no guarantee may be given 
as to the payment of interest or security 
of principal of the bonds of companies 
whose plants are under construction. 



Tage 75 



Fundamental Investment Principles 

Gas Bonds 

Gas company bonds should only be 
bought of companies operating in large 
cities where they serve a great popula- 
tion. Gas cannot be sold at a profit if 
the company operates on a small scale. 

It should be remembered that gas 
companies have been revolutionized in 
late years because of the competition 
of companies furnishing electric power, 
which is used for fuel as well as 
illuminating purposes. There are two 
kinds of gas companies, those which 
supply natural gas and those which 
manufacture and supply artificial gas. 

Water Bonds 

Bonds of water companies make very 
desirable investments. Water is a raw 
material and free of cost. Competi- 
tion is reduced to a minimum, for water 
companies generally enjoy a monopoly. 

Bonds of such companies suffer but 

Page 76 



Fundamental I n vest m ent Pri n ci pies 

little depreciation and are usually pur- 
chased by people living in the commu- 
nity where the companies operate. 

The quality of water must be abso- 
lutely pure and the assurance must ex- 
ist for a steadily increasing demand 
pro rata to the increase in population. 
Water companies are operated either 
by gravity, this being the most econom- 
ical, or by a pumping system, which is 
more expensive to install. Water bonds 
are usually good, yet some of doubtful 
value are in existence. 

Telephone and Telegraph Bonds 

Bonds of telephone and telegraph 
companies, especially of the larger ones, 
are considered quite desirable since 
these bonds represent a very useful and 
essential necessity. Securities of the 
Bell Telephone Company, Western 
Union and Postal and all their subsid- 
iaries are preferred to the issues of 
smaller companies operating in a lim- 
ited territory. 

Page 77 



Fundamental Investment Principles 

Timber Bonds 

Timber bonds are not considered a 
good risk because of the ever-prevailing 
danger of forest fires. 

The timber value is usually gauged 
by its location. Timber which is remote 
from transportation facilities is of no 
great value. Timber bond issues should 
at all times provide for a sinking fund 
and the mortgage should include all of 
the company's assets. A great many 
of these issues are even personally 
guaranteed by those interested in the 
company. Special stress should be laid 
on clear titles. 

As an exact determination of the 
value of the timber is necessary, a cer- 
tified impartial appraisal should be fur- 
nished. Only experienced, well-known 
cruisers should be employed. Cruis- 
ing means an appraisal made by ex- 
perienced lumbermen who go through 
the forest and make an estimate of the 
standing timber. 

Page 78 



Fundamental I fives t w e nt Pr i n ei pies 

The security in timber bonds rests on 
the actual amount of timber. If the 
forest is located in Canada one should 
ascertain whether it is owned in fee. 
The Canadian Government does not 
sell timber lands but only licenses its 
cutting and removal. 

Coal and Mining Bonds 

The appraisal value of the property 
which secures coal and mining bonds is 
not easily determined. The quantity 
of raw material may only be ascer- 
tained approximately. 

These bonds are not considered a 
sound investment and should be avoid- 
ed by those seeking dependable, con- 
servative securities. 

Irrigation Bonds 

Irrigation bonds are not the best form 
of investment as in the past many of 
them have been defaulted. While there 

Page 79 



Fundamental Investment Principles 

are some real good outstanding issues, 
it is seldom good policy to invest in 
them, many investors refusing even to 
take them into consideration. 



Page 80 






CORPORATIONS 



CHAPTER III. 

Corporations 

A corporation is best defined as an 
artificial being, invisible, intangible, 
and existing only in contemplation of 
law. It is, in all its rights and privi- 
leges, almost identical to a natural per- 
son. 

Corporation Laws 

Every state, as well as the United 
States, has its own laws governing the 
incorporation and operation of compa- 
nies. Some states have restrictions 
which are of great benefit to the stock- 
holders, while the statutes of others are 
more liberal and do not provide as 
many safeguards. For this reason it is 
important to determine the state in 
which the company is incorporated. 

Page 83 



Fundamental Investment Principles 

Organization 

The first step in the organization of 
a corporation is an application to the 
secretary of state, making a statement 
as to the object of the proposed cor- 
poration, amount of capital stock, et 
cetera. This is usually done by three 
or more individuals called commission- 
ers, to whom, when all statutory re- 
quirements have been complied with, 
the secretary of state by virtue of the 
authority vested in him by law, issues 
a certificate of complete incorporation 
and a license to do business, known as 
a charter. The procedure varies some- 
what in the several states. 

A corporate charter may be granted 
under the general laws, special laws, or 
in the case of public utilities and state 
banks by the state legislature in some 
states. All charters for national banks 
are granted by the federal government. 



Page 84 



Fundamental Investment Principle* 

Private Corporations 

There are two classes of private cor- 
porations, domestic and foreign. A do- 
mestic corporation is one operating in 
the state in which it is organized. A 
foreign corporation is organized under 
the laws of one state and operates in 
that and other states. 

Charter 

A charter prescribes the powers of a 
corporation which are necessary to 
properly conduct the business, and stip- 
ulates the authorized capital. A cor- 
poration has no power except that 
granted in its charter and such powers 
as are necessarily implied from the na- 
ture of its business. 

While the name, the authorized cap- 
ital, et cetera, may be changed, there 
can never be a change as to the object 
for which a corporation is organized. 
A corporation whose charter states for 
its object the generation of electric 

Page 85 



Fundamental Investment Principles 

power, cannot manufacture ice, shoes, 
et cetera. 

Certificate or Incorporation 
A certificate of incorporation is, in 
so far as the powers of the corporation 
are concerned, restricted to the laws of 
the state in which it is organized; but 
a foreign corporation may operate in 
any state where it has complied with 
the laws of that state. 

Issue of Stock 

The issue of stock means the issue of 
certificates. A share of stock is evi- 
dence of the interest which the holder 
has in the corporation. The face value 
of stock represents the money or prop- 
erty paid in. 

It is ordinarily divided into equal 
shares of a determinate value and is- 
sued to the stockholders in proportion 
to the amounts which they have paid in, 
or for which they are liable. The cap- 
ital stock and the value of each share is 
fixed by the corporate charter. 

Page 86 



Fundamental Investment Prineiples 

Share of Stock 

A share of stock is participating and 
bears no due date. A stockholder is 
entitled to one vote for each share of 
stock held, in the choice of directors, 
who are, in turn, entrusted with the 
management of the company, unless 
definitely stated otherwise. 

A share of stock has no definite in- 
come but participates in the profits 
in the form of dividends. The princi- 
pal is never realized except upon the 
dissolution and winding up of the cor- 
poration. 

A share of stock has, however, many 
qualities of negotiable instruments and 
can be sold, transferred and assigned; 
but this transfer or assignment must be 
recorded on the books of the company. 

Two Classes of Stock 

There are two classes of stock, com- 
mon and preferred. Preferred stock 
usually receives a stipulated percent of 

Page 87 



Fundamental Investment Principles 

the earnings, known as a dividend. This 
must be paid before the holders of com- 
mon stock are entitled to anything ; but 
if the company's earnings are not suf- 
ficient to pay the preferred stockholder 
his dividend, he receives nothing until 
the earnings are large enough to pay 
the prescribed amount. A dividend is 
only payable and demandable when 
actually earned and declared by the 
board of directors. 

It is sometimes provided that after 
the common stock has received a divi- 
dend equal to the preferred, that then 
both common and preferred are to 
share equally in the surplus. 

Some preferred stock has a cumula- 
tive interest. Assuming that the inter- 
est is omitted, passed or reduced semi- 
annually or annually, as the case may 
be, and the company's earnings have 
not been sufficiently great to warrant a 
dividend, the yearly amount of the 
stated dividend of the preferred stock 
accumulates, and this total amount of 

Page 88 



F unci a mental Investment Principles 

dividends must be paid on a subsequent 
date. 

Stock may be an investment or a 
speculation, depending entirely upon 
the company issuing it. A stockholder 
is liable only to the extent of his unpaid 
subscription, unless the certificate pro- 
vides for assessments. 

There are, however, corporations 
where the law renders the stockholders 
liable, as is the case in all banks stocks 
where the liability is double the amount 
of the stock. 

The stockholder has no legal title to 
the property or profit of a corporation 
until a dividend is declared or a division 
is made on the dissolution of the cor- 
poration; but the preferred stock can- 
not participate in any increased value 
of the principal unless expressly so 
stipulated in the certificate. 

Right to Vote Stock 

Stockholders have, as already men- 
tioned, a vote for each share of stock 

Page 89 



Fundamental Investment Principles 

at any meeting. At stockholders 
meetings the affairs of the company are 
reported, financial conditions discussed, 
directors elected, et cetera. 

The election of directors is very im- 
portant as the law vests absolute power 
in the board of directors and the stock- 
holders cannot interfere except in the 
most unusual cases. The directors in 
turn vote on and elect the officers who 
are entrusted with the actual manage- 
ment of the corporation. 

Preferred stock may be retired, that 
is, it may be called in, at certain periods 
at the election of the board of directors, 
if so stated on the certificate. 

Reports 

Every corporation is compelled by 
law to make reports concerning its 
financial condition at regular intervals, 
usually annual, to the state or federal 
authorities. 



Page 90 



F und a menial Investment Principles 

Preferred Stock 

Preferred stock is the class of stock 
commonly offered for sale to the pub- 
lic. There seems to be a great deal of 
misunderstanding relative to the intrin- 
sic value of preferred stock. An as- 
sumption prevails that preferred stock 
is an obligation and that the principal 
is guaranteed, or that it carries a lien 
or mortgage. Preferred stock has cer- 
tain privileges but is never protected 
by any form of collateral. 

The greatest care must be exercised 
when purchasing perf erred stock. One 
must be familiar with the questions on 
pages fifteen to twenty-five in order to 
analyze the relative merits of this stock. 
Systematic investigations of all such 
offerings must be rigidly pursued, for 
this lias a very decided bearing on your 
future success or failure. Under no cir- 
cumstances should this be overlooked or 
slighted as it is more necessary in se- 
curities of this kind than in any other. 

Page 91 



Fundamental Investment Principles 

Preferred stocks very rarely possess 
the qualities which constitute an ideal 
investment. Stocks, whether preferred 
or common, listed or unlisted, should 
rarely be bought where an entirely safe 
investment is desired. 

On the one hand there is constantly 
a great fluctuation as to principal, while 
on the other there are stocks which, 
while speculative, may be considered as 
an investment ; some of these are stocks 
of the Delaware, Lackawanna & West- 
ern Railroad, American Telephone & 
Telegraph Company, and still others in 
which the principal as well as the inter- 
est is safe, such as Ford Automobile 
Company, Royal Baking Powder Com- 
pany, Swift & Company, et cetera. 

Guaranteed Stocks 

There are, however, guaranteed 
stocks. Holding companies or rail- 
roads often come into possession or con- 
trol of other companies. When such a 
transfer occurs an agreement is usually 

Page 92 



Fundamental Investment Pri n ei pies 

entered into, to the effect that the parent 
or holding company shall execute what 
is commonly known as a guarantee of 
the stock of companies acquired or con- 
trolled. 

Obviously such a guarantee merely 
represents the prompt and continuous 
payment of dividends, rather than a 
guarantee of the principal. Such a 
guarantee agreement could not possi- 
bly extend beyond the payment of divi- 
dends, as no one can forecast the value 
of the assets at the termination or dis- 
solution of such acquired companies. 

Difference Between Bonds and 
Stocks 

Bear in mind that there is a great 
difference between a bond and a share 
of stock. Stock is not an acknowledg- 
ment of indebtedness, while a bond is. 
In order to clearly establish the value 
of such a guarantee it is essential that 
the character of the parent or holding 

< 93 



Fundamental Investment Principles 

company should be excellent and its 
financial condition strong enough to 
give assurance of payment, otherwise, 
the liability assumed and the guaran- 
tee given by the endorsement of the 
parent or holding company would be 
worthless. 

Stock Exchanges 

Stock exchanges are located in every 
large city in the United States, as well 
as in European cities. 

Stock exchanges provide a ready 
market to investors for the immense 
quantity of indebtedness, such as bonds, 
stock and notes, which exists today. 

Listed securities are entitled to more 
consideration because the public has a 
fair assurance that it is thereby partially 
protected from fraudulent misrepresen- 
tations. As outlined in the following 
paragraphs, the rules and regulations of 
the various exchanges are strict and by 
the very fact that securities of a corpo- 

Page 94 



F u n d a m cntal I n v c I / m c n t P t i nciplcs 

ration are listed, the public will have a 
reasonable assurance that the corpora- 
tion is being operated and conducted on 
a fairly clean basis. 

Rules of Stock Exchanges 

There are many rules concerning 
listed securities which protect the in- 
vestor, to a great degree, from losses 
growing out of irregularities and frauds 
which are sometimes resorted to by un- 
scrupulous promoters and speculators. 

Stock exchanges require, before list- 
ing securities, that statements be filed 
with them, which are carefully exam- 
ined, concerning the location and de- 
scription of the property ; the organiza- 
tion of the corporation ; authorized cap- 
ital stock; number of shares; officers 
and directors; its franchises and equip- 
ment; assets, liabilities and earnings; 
the amount and description of mort- 
gage liens and other indebtedness on 
leases, guarantees, rentals, et cetera, and 
the terms of payment. Copies must be 

Page 95 



Fundamental Investment Principles 

furnished of trust deeds, mortgage and 
other corporate agreements, as well as 
a certified balance sheet and statement. 
Also, a certificate from an expert civil 
engineer describing the actual physical 
condition of the property. 

Application for Listing 

When application is made regarding 
the securities of a corporation which 
has been reorganized after insolvency, 
stock exchanges require a full and com- 
plete financial statement of this cor- 
poration covering a period of one year 
prior to reorganization; a detailed 
statement of earnings and receipts from 
every source; a detailed account of all 
expenditures; the amount of all out- 
standing indebtedness; a balance sheet 
of the reorganized company; amount 
and description of the various securities 
issued; the purposes and terms of the 
reorganization. 

If the property has been disposed of 
by order of court, copies of the order 

Page 96 



Fundamental Investment Principles 

confirming such a sale, together with 
the history of the proceedings, must be 
produced. A certificate from counsel 
stating that all legal requirements have 
been complied with and showing be- 
yond a possible doubt that the title to 
the property is fully vested in the new 
corporation, free from all liens and en- 
cumbrances, except such as are speci- 
fied and issued by the reorganized cor- 
poration, must be submitted. When 
bonds are issued to replace other au- 
thorized prior issues, evidence of satis- 
faction of such prior liens or a cancella- 
tion of retired bonds, is a condition pre- 
cedent to listing. 

If additional amounts of securities 
are to be listed a statement of the 
amount and the character of the addi- 
tional issue, the authority therefor and 
the application of the proceeds must be 
shown. If new properties have been 
acquired, these must be described in de- 
tail. If any property lias been mort- 
gaged a certificate of the county clerk 

Page 97 



Fundamental Investment Principles 

of each county, showing where the mort- 
gaged property is located, must be pro- 
duced in order to prove that a mort- 
gage has been recorded. Sometimes a 
certificate from the secretary of state is 
necessary to prove the record of mort- 
gages in several counties. 

A copy of the charter and by-laws of 
the company must be filed, together 
with a copy from counsel showing that 
the company has been legally organ- 
ized, securities legally issued, et cetera. 
These and other details which tend to 
protect the individual investor are nec- 
essary in order that securities may be 
listed. 

There is a distinction between listed 
and unlisted securities, both kinds hav- 
ing their advantages as well as their 
disadvantages. 

Unlisted Securities 

Unlisted securities are sold independ- 
ently of the stock exchange and, while 

Page 98 



F undo, m c ntal I nv c s t in cut Pri n c i pi c s 

not as quickly salable as those which are 
listed, are not subject to fluctuation and 
manipulation to as great a degree as the 
latter. Very often they constitute quite 
sa I :isf actor y investments, especially 
when issued by substantial, well regu- 
lated companies and sold by houses of 
established reputation. 

Many prosperous companies which 
command the highest respect and are 
able to point to a number of years of 
successful operation, do not wish to in- 
cur the expense of listing their stocks 
and bonds; However, the financial 
statements which they publish at regu- 
lar intervals should indicate and reveal 
the fact that their affairs are regular 
and that no reverses have been experi- 
enced; that the earnings are constant. 
In such companies the most economical 
methods of operation and the conserva- 
tive management are almost absolute 
assurances that the money invested is 
safe, and that the investment itself is 
desirable. For instance, the stock of 

Page 99 



Fundamental Investment Principles 

the Standard Oil Company has never 
been listed, yet it constitutes a highly 
profitable investment. 

There is absolutely no advantage in 
buying listed securities when seeking an 
investment to extend over a period <)f 
years. If marketability does not enter 
in as an important factor, one may 
often obtain greater returns without 
sacrificing the security of principal. 

One point in favor of listed securities 
is the small commission which must be 
paid in case of buying or selling. This 
commission is naturally larger on un- 
listed securities as it is more difficult for 
the broker to locate a buyer at the prop- 
er time. This, however, should not be 
an objection when buying unlisted se- 
curities, especially when the selection is 
made with the intention of holding 
them as a permanent investment. 



Page 100 



MORTGAGES 



CHAPTER IV. 

Mortgages 

In making investments it is well to 
bear in mind whether or not the prop- 
erty purchased may be readily and 
quickly disposed of. For this reason 
real estate mortgages may be classed 
with the less desirable because of the 
slow, tedious operation necessary to re- 
cover the principal in case default is 
made. 

Should a mortgage debt not be paid 
at maturity it becomes necessary to 
commence foreclosure proceedings. 
There is some misconception concern- 
ing these proceedings, for a common 
belief seems to exist that when the time 
of payment of the mortgage debt has 
arrived and the mortgagor has failed to 

Page 103 



Fundamental Investment Principles 

pay, that the mortgagee may then take 
possession of the land and sell the same. 
This is not quite the case, for in most 
states the mortgagor has a specific pe- 
riod of time, usually one year, in which 
to redeem after he has failed to meet 
his obligation. Thus, instead of having 
possession of the land from the day of 
default by the mortgagor the mortga- 
gee must often wait from sixteen to 
eighteen months before he receives full 
satisfaction. 

Notwithstanding this inconvenience 
and delay, however, the money invested 
in real estate mortgages, if the precau- 
tions outlined in this work are taken, 
is quite safe and secure. The investor 
need have little fear, for the price and 
value of real estate is not subject to 
frenzied fluctuations. Its value is steady 
and rises or falls gradually and in pro- 
portion to the nature of local condi- 
tions, such as, street car extensions, 
opening of new sub-divisions, building 
of factories, saloons, et cetera. 

Page 104 



Fundamental Investment Princi pies 

In taking a mortgage, the laws of the 
state should be carefully investigated, 
as the rights of the parties thereto vary 
materially in the several states. Their 
right to possession, to the manner of 
foreclosure, to the rents and profits, to 
demand repair of the mortgagor, et 
cetera, are almost entirely regulated by 
statutes and must be followed. 

The investor should look to the rec- 
ord books and ascertain the nature of 
the title of the property to be mort- 
gaged. There may be an existing 
mortgage and the rights of the first 
mortgagee are then superior to those 
of the second. The title to the land 
may be in dispute, or others may have 
rights over the land, but not to the land 
itself. In farm mortgages, especially, 
the crop may be mortgaged, or in in- 
come property the rents may be as- 
signed or mortgaged. If the instru- 
ment making the assignment or mort- 
gage is not recorded, then little fear 
need be entertained, for the first record- 
Page 105 



Fundamental Investment Principles 

ed mortgage generally takes priority 
over other unrecorded instruments. It 
is, therefore, essential that the mort- 
gage be recorded at once after it is 
made. 

Conservative saving banks will loan 
on real property to about 60% of its 
value. If the investor is in a position 
to make a personal investigation he 
should do so by all means, always bear- 
ing in mind that in making a mortgage 
he is at the same time a conditional 
purchaser. 

First Mortgage Real Estate Bonds 

A first mortgage real estate bond is 
to be preferred to a real estate mort- 
gage because bond houses of established 
reputation critically and carefully ex- 
amine every point tending to the safety 
and desirability of making such loans. 
Investors buying first real estate mort- 
gage bonds, from conservative, reliable 
firms, have not the cares coincident with 

Page 106 



F u n damental Investment Pr i net pie s 

a mortgage, such as collecting interest, 
taking insurance and making repairs. 

First mortgage bonds do not, as a 
general rule, enjoy a quick sale because 
of their analogy to mortgages ; but they 
form a safe investment. Persons wish- 
ing to employ their funds for a term of 
years often select such securities. 

Two Classes of Real Estate Bonds 

Two classes of real estate bonds 
should be distinguished — mortgage and 
debenture bonds. A debenture bond 
covers only the equity in the property 
or the income of the same and is but a 
mere promise to pay. 

For years a New York real estate 
company has been very successful and 
most prosperous in its real estate op- 
erations. It owns desirable, developed 
property, which shows good earnings; 
its property is impartially appraised 
yearly: its books are properly audited, 
and financial statements are easily pro- 
Page 107 



Fundamental Investment Principles 

cured; the management has been and 
is excellent. It has returned a great 
deal of money to investors, represent- 
ing a quantity of bonds, in coupon form, 
of convenient denominations, and bonds 
payable in installments. These bonds, 
though they are only debentures, enjoy 
a good reputation and are eagerly 
sought by a great many investors be- 
cause of their high rate of interest. 

Several other concerns of compara- 
tively recent origin have imitated the 
methods of this old and successful firm 
and have introduced a similar bond. 
The property acquired by the imitating 
real estate firms was of inferior, unes- 
tablished value and for the greater part 
undeveloped. Their methods were 
reckless and questionable and bordered 
on high finance, consequently serious 
losses have resulted by reason of the 
failure of such concerns. 

However, the state of New York has 
lately passed laws which place restric- 
tions on companies issuing real estate 

Page 108 



F undamental Investment Princi pie s 

bonds, thereby greatly protecting the 
interests of investors. 

Buying Real Estate 

When buying real estate as an invest- 
ment, the same care should be exercised 
as in the case of a mortgage. Buying 
lots in new additions or subdivisions, 
ore and timber lands, worn out farms 
with the hope of building them up, are 
all rash speculations and we should ad- 
vise decidedly against such purchases, 
except perhaps after the most exhaust- 
ive and rigorous investigation. 

Buying Improved Income Property 

When buying improved income prop- 
erty, or in making a mortgage on such 
property, the present and prospective 
value should be considered, together 
with the probability of vacancies, insur- 
ance, local conditions, repairs, taxes, 
payment of rents, troublesome tenants, 
ct cetera. 

Page 109 



Fundamental Investment Principles 

Bear in mind the following cardinal 
principle when buying real estate or 
making a mortgage. If in any way 
possible personally inspect the proper- 
ty and acquaint yourself with local con- 
ditions ; but if this cannot be done send 
some representative in whom you have 
implicit confidence and trust, who may 
appraise the same impartially. Proceed 
only when satisfied from your own point 
of view, disregarding the velvet argu- 
ments and possibilities suggested by the 
person selling. 

A comparison of the relative advan- 
tages between mortgages and real 
estate bonds leads to but one conclu- 
sion. Mortgages are good investments 
when the purchaser is thoroughly ac- 
quainted with the value of the property, 
the character of the owner and is 
absolutely assured of a clear title. The 
title of the mortgaged property should 
be insured by a title guarantee com- 
pany. 

Real estate bonds, which are secured 

Page 110 



F u n d anient a I I n v t s t in e n t P t i nci pic s 

by a first mortgage, when issued by re- 
liable, responsible houses, constitute a 
very satisfactory investment in every 
respect. They are to be recommended 
because of the high rate of interest 
which they bear, as well as the non-fluc- 
tuating qualities of the principal. 

Real estate bonds, which represent 
debentures, must be very carefully se- 
lected and one should be absolutely sat- 
isfied as to the conservative methods of 
the companies issuing them. The finan- 
cial statements of such companies to- 
gether with the management should be 
beyond suspicion, otherwise an invest- 
ment in such bonds may prove disas- 
trous. 



Page 111 



PARTNERSHIPS 



CHAPTER V. 

Partnerships 

To the man who wishes to enter into 
a partnership for any purpose, other 
than professional, such as law, medi- 
cine, dentistry, et cetera, it may be well 
to state that partnerships are not the 
ideal manner in which to conduct busi- 
ness in this age. They are an institu- 
tion of the past. They are obsolescent, 
for they no longer fulfill the require- 
ments of present day business and man- 
ufacturing enterprises. 

Although partnerships are entered 
into daily, they are to be discouraged 
because of the great inconvenience of 
doing business through them. Be the 
enterprise ever so small, a corporation 
should be formed to carry it on. The 

Page llo 



Fundamental Investment Principles 

reasons for this are numerous and all 
important as will be briefly outlined 
below. 

In the first place, the life of a part- 
nership is limited. If one partner dies 
the partnership comes to an end auto- 
matically. There is a winding up of its 
affairs. When the debts have been paid 
and accounts collected, the assets re- 
maining, if any, are distributed, unless 
otherwise specifically stated in the part- 
nership agreement. In a corporation 
this is not the case, for the corporation 
is a being in itself. It cannot die, for 
its life is limited only by the time men- 
tioned in its charter, usually ninety- 
nine years; or by voluntary dissolution 
or by dissolution on the part of the 
state. 

In a partnership each partner is li- 
able for the entire debts of the concern. 
Each partner may bind himself and his 
co-partners to any amount, when act- 
ing on partnership business, making 
them all liable. Such liability does not 

Page 116 



Fundamental I n v t s t w cut P r i ?i cipleg 

exist in corporations. The stockhold- 
ers are only liable to creditors to the 
amount of their unpaid stock, but no 
further. The corporation itself is liable 
for its debts. The corporation being 
separate and distinct from its stock- 
holders, the latter cannot bind the 
former in any way. Only the officers, 
elected for that purpose, may do so, but 
only to a limited extent, usually to the 
amount of its capital stock. 

If the business dealings and princi- 
ples of a partnership are not satisfac- 
tory to all the partners and they can- 
not come to an agreement, the only 
course remaining is a dissolution and 
winding up of the affairs of the firm. 
In a corporation this may be overcome 
by electing a new board of directors, 
who in turn elect the officers. 

If one partner becomes insane the 
firm is thereby dissolved. In a corpora- 
tion all of the directors and stockhold- 
ers may become insane, but the cor- 
porate being still remains. 

Page 117 



Fundamental Investment Principles 

Again, where great enterprises are 
to be undertaken, the infeasibility of a 
partnership may readily be understood. 
The burden would be too great upon a 
group of three or four men to finance 
and bear the responsibilities of an en- 
terprise involving a million dollars or 
more; whereas in a corporation, which 
may comprise any number of persons, 
the individuals would be relieved and 
the corporation itself would assume the 
burden. 

With the exception of a very few oc- 
cupations any enterprise may be incor- 
porated. The cost of so doing is small 
and the attendant advantages are so 
great that any person expecting to en- 
ter into a partnership should first in- 
vestigate the opportunities for incor- 
poration and then proceed. If the par- 
ties with whom one intends to become 
associated refuse to allow incorporation 
and have no cogent reason for so doing, 
it is best to hesitate. 

Page 118 



CONCLUSION 



CHAPTER VI. 

Remarks in Conclusion 

The opinions of men qualified to 
judge investments differ decidedly. 
Persons have likes and dislikes. One 
may buy municipal and railroad securi- 
ties, another public utilities or indus- 
trial corporation securities, still another 
prefers short term investments. Each 
investor must determine for himself the 
character of securities which are best 
suited to his individual requirements 
and tastes. 

There will be little difficulty in se- 
lecting a good investment, and the 
knowledge required to do so will be 
readily gained, if the principles out- 
lined in this work are carefully and stu- 
diously applied. "Safety First" in this 
case means a real investigation first. 

Page 121 



Fundamental Investment Principles 

Test all offerings by applying every 
question found on pages fifteen to 
twenty-five in addition to the special 
suggestions and advice given. Buy only 
seasoned securities which produce a 
continuous and steady income. Hard 
and fast rules cannot be established for 
the wide range of investment offerings ; 
but if the many pitfalls which are 
pointed out in the foregoing pages are 
avoided, one may proceed with a reason- 
able degree of assurance of being 
properly guided, especially if only reli- 
able bond dealers are selected. 

In order to determine the value of 
bonds personally, one should inquire of 
a bank, which is located in the neigh- 
borhood of the property securing the 
bonds, as to its value. Apply such 
questions as may assist you in your de- 
termination. 

Attempt to make a loan, with the se- 
curity which you expect to select as 
collateral. In this manner you may ob- 
tain the banker's true opinion as to the 

Page 122 



Fundamental Investment Principles 

value of the bond. Eliminate every 
form of investment which may not be 
used as collateral. The best evidence 
of the value of a bond is the amount 
which may be loaned when it is placed 
as collateral security. 

Employ your money in undertakings 
within your own community or state. 
Investigation is thereby facilitated, for 
you should be more familiar with local 
conditions and circumstances surround- 
ing such enterprises. You will be in a 
position to protect your investment 
after it has been purchased. 
Never Buy if a company does not 
make public everything in regard 
to its finances and all of its af- 
fairs in respect to holdings, sub- 
sidiary companies or connections 
which it may have with other 
companies, in any way, shape or 
form. A short time ago a great 
many banks suffered severe losses 
through their inability to thor- 
oughly analyze the statements of 

Page 123 



Fundamental Investment Principles 

a company whose paper they held. 
This company showed an appar- 
ently clean balance sheet which 
did not, on its face, give sufficient 
information concerning the in- 
debtedness assumed for its subsid- 
iaries. You should be able to an- 
alyze the financial statements of 
corporations, intelligently and un- 
derstandingly. The inability so to 
do may and often does, prove a 
great pitfall, even to banks, as 
above illustrated. 

Never Buy if a company is over- 
capitalized. This is axiomatic. 
Over capitalization acts as a mill- 
stone which decreases earnings and 
shows inflated fictitious values in 
regard to holdings, machinery, 
equipment, et cetera. 

Never Buy if the rate of commission 
which a company pays to its 
fiscal agents is unusually large, 
or if a company is attempting to 
eliminate competition and establish 

Page 124 



Fund a m ental I n v e stment Principles 

a monopoly. This ordinarily 
causes the payment of enormous 
prices for property acquired to 
eliminate competitors. 

The net earnings of a company 
should be carefully scrutinized and as- 
certained for a number of years pre- 
vious to a bond issue or to the issue of 
additional stock. Earnings should be 
equal to at least three to eight times 
the interest on the issue. In the case 
of public service or railroad bonds from 
three to four times the amount, and in 
industrial offerings from four to eight 
times. 

A great many attacks have been 
made in recent years on the administra- 
tion of railroads, public utilities and 
other corporations. This period of 
muckraking has depressed the security 
market. The result, however, has been 
wholesome. 

The many abuses of which these cor- 
porations have been guilty in the past 
are now practically overcome. This re- 
Page 136 



Fundamental Investment Principles 

form wave is almost spent and rail- 
roads have shown themselves excep- 
tionally responsive to the demands of 
the public and the suspicion, previously 
existing, has been replaced by a feeling 
of confidence and trust. Shiftless 
and unscientific methods have been dis- 
carded. Extravagance is now absolute- 
ly prohibited and the formidable move- 
ment tending to regulate their actions 
has been a success. 

The Interstate Commerce Commis- 
sion has been created and is active in 
regulating and prescribing equipment, 
methods, rates, et cetera. While these 
regulations were at first considered un- 
usually drastic, the result seems to be 
satisfactory to everyone concerned. 

Public Utilities Commissions have 
taken the place of the Interstate Com- 
merce Commission, in regard to rail- 
roads, where the latter has no power to 
act. They supervise public utilities 
corporations and have been influential 
in establishing cleaner financial meth- 

Page 126 



Fundamental Investment Principles 

ods of all such companies; thereby un- 
questionably strengthening their securi- 
ties. 

Laws have been enacted for the closer 
scrutiny of the actions of corporations. 
Investments in the larger and better 
known companies may be made today 
with a great deal more confidence than 
was possible before the creation of the 
various commissions and laws above 
mentioned. 

Government ownership of railroads 
and public utilities is far from realiza- 
tion in the United States. Because of 
the inferior service given by such insti- 
tutions in Europe, where nearly all pub- 
lic utilities are owned and operated by 
the government, and because of the su- 
perior conveniences, equipment, service, 
ct cetera, which we have in the United 
States, government ownership of pub- 
lic utilities is something which may be 
realized in the distant future. 



Page 127 



LIBRARY OF CONGRESS 



021 051 055 2 



